Global Insight Perspective | |
Significance | The Brazilian state oil company has expressed its willingness to convert its contract for Block 18 and the unified Palo Azul field to a service agreement, following a meeting with President Rafael Correa and the Minister of Mines and Petroleum Galo Chiriboga. |
Implications | Petrobras's acceptance of new contract terms is particularly significant as the alternative option—pulling out of the country—would have sent a negative signal to other foreign companies involved in contract renegotiations with the government. |
Outlook | Talks will now begin with Petrobras over the reaching of a final agreement, while contract negotiations continue with other companies present in the sector. |
Petrobras Wiling to Renegotiate Contract
Ecuador's Minister of Mines and Petroleum Galo Chiriboga announced yesterday that the Brazilian state oil company Petrobras has agreed to migrate its existing contract to a service agreement, and both parties have agreed to start negotiations immediately. According to press reports, Petrobras has also agreed to suspend an international arbitration claim against the government for a period of 45 days in order to facilitate the talks.
Petrobras is one of several foreign companies currently engaged in talks with the government to renegotiate contracts. The administration of Rafael Correa wants to persuade companies to switch their existing participation contracts for service agreements and has offered to reduce a controversial windfall oil tax from 99% to 70% if companies drop their arbitration claims and agree to new contracts.
The accord with Petrobras is particularly significant as, apart from objecting to the windfall tax as other foreign companies operating in the sector have done, the Brazilian company had been embroiled in a contract dispute with the government. Among other things, Petrobras was accused of transferring a 40% stake in the contract for Block 18 and the unified Palo Azul field to Japan's Teikoku without authorisation. Petrobras itself has repeatedly denied the allegations of contract irregularities and stated that it respects all Ecuadorian laws. Pressure on the company increased in February 2008, following a recommendation from the then-attorney-general Xavier Garaicoa that the mines and petroleum minister start proceedings to annul the contract held by Petrobras. The state oil company Petroecuador is reportedly studying the petition but no decision has been taken to terminate the contract.
Petrobras also has a contract for Block 31, but negotiations over this are will be held at a later stage.
Outlook and Implications
Brazil's President Luiz Inácio Lula da Silva has portrayed Brazil as a bridge between rival ideologies in the region, with investments by the state oil company in other South America nations playing an important role in helping to further regional integration. Although the Brazilian government has to date refrained from making public statements on the contract dispute between Petrobras and the Ecuadorian government, Petrobras's withdrawal from the country or a protracted court battle could have created tensions in diplomatic relations between Ecuador and Brazil. This could in turn have had broader geopolitical implications as Venezuela's President Hugo Chávez is a close political ally of President Correa and Ecuador's new oil contracts are closely modelled on new contracts introduced in Venezuela and Bolivia. Petrobras previously accepted the legal and fiscal changes introduced in both these countries and its willingness to migrate its existing contract in Ecuador to a service agreement will therefore not have come as a surprise. Nonetheless the contract dispute had complicated negotiations and made the outcome less certain.
The dispute could still complicate the forthcoming talks over the terms of the new contract as the company will want assurances that the energy authorities are satisfied with the defence that it has submitted against the accusations of contract irregularities, Nonetheless, the prospects of an amicable agreement being reached have greatly improved following yesterday's accord.
The accord will also be a political boost for the Correa administration and its project to restructure the oil industry, especially as it follows the recent news of two companies rejecting the new contracts. An amicable agreement was reached with U.S.-owned City Oriente that will see Petroecuador take over its assets in the country in return for a compensation payment, while the French company Perenco's contract for Blocks 7 and 21 in Ecuador's Amazon region is set to be terminated unless an accord is reached. According to local press reports President Correa is due to meet with representatives of the Spanish company Repsol and China's Andes Petroleum later today, but both companies have already expressed a willingness to drop arbitration claims. If these companies also agree to sign up to new contracts, the chances of investments that have been frozen due to legal and fiscal uncertainty resuming in the coming year will significantly increase.